In my previous unemployment week posts, I explained what the unemployment rate means and how economists look at the consequences of unemployment, both in the long run and in the short run. Today, I revert to a more classical description of unemployment that may shed some light on why unemployment is so persistent during this recession.
I classify unemployment into three types: Each is defined with reference to the reason that people are unemployed.
First, there's frictional unemployment, which occurs naturally in any economy. People have to search to find an employer who needs their specific skills. Finding the right employee-employer match takes time and energy. Individuals have to look for the right job, and firms have to screen individuals for the right qualifications. This takes some time. Therefore, there will always be some level of unemployment in the healthiest of economies.
Second, there's cyclical unemployment, which rises and falls with busts and booms in the macroeconomy. When the economy is booming, cyclical unemployment declines. In ordinary recessions, cyclical unemployment rises.
Finally, there's structural unemployment, which comes from a fundamental imbalance between the skills of workers and the needs of employers/industries to utilize those skills.
For example, if too many people invested in financial services skills because of a bubble in the financial sector, then we should expect structural unemployment in that sector just after the bubble pops. The level of structural unemployment will decline as people acquire skills necessary to switch industries.
The industries in any economy are declining and rising dynamically over time. As a result, there's never a perfect match between the skills employees have and the jobs employers are offering. Therefore, some structural unemployment is inevitable. Nevertheless, in hard times, when several important industries go bust or contract sharply (as is the case with the housing bubble and financial meltdown), there's a large degree of structural unemployment.
And, I expect that is a significant component of our current unemployment woes. Big auto companies are either going under, or laying off a significant fraction of their workforce; Financial firms have gone bust. And, these events have left many individuals with specific skills that are no longer in high demand.
So, what does this mean for our current unemployed workers?
First, if you are a worker in one of these suffering industries, my advice to you is to look at your skill set and ask whether you can use your skills in some other industry or occupation. If you're lucky, you can. If you're unlucky, I would suggest developing skills that make you employable elsewhere. That's rough advice, but if your industry has gone away, it's the best advice I can offer.
Second, if you are a policymaker trying to make economically sensible policy, I would suggest that you emphasize programs that retrain workers in these blighted industries. The natural temptation is to prop up these old industries with programs like Cash for Clunkers, but that's not a good idea. Subsidies to the auto industry will merely encourage people to stick with a dying industry longer than they should.
The declining auto industry is a signal that our workers should be trained to do something else. It may be painful to retrain our unemployed workers now, but that's a better option than setting them up for another collapse several years from now. If the government is compelled to intervene, it should offer workers the option to find employment elsewhere.
This is the fourth article for unemployment week on This Young Economist. In tomorrow's post, I discuss the relationship between mandatory employee rights and unemployment. See you tomorrow.